Don’t Invest, Gamble!

Phoenix Capital Research has a very negative outlook on the near term. Their outlook is similar to my own (my emphasis added):

We have been getting MAJOR warning signs of a collapse for months now. No less than the Bank of England, the IMF, and legendary asset management firm Franklin Templeton have warned that we are facing an epic, hellish crisis.

We got the first taste of this in August when the S&P 500 literally wiped out a year’s worth of gains in two weeks The only thing that brought us back from the brink at that time was the belief that the EU mess might be solvable and a coordinated intervention from the world Central Banks.

We then had a spirited rally as the Fed and central banks went “all in” to force the stock market above its 200-DMA.

This final “hurrah” has failed and the financial system is literally imploding. The EU will be broken up in the next month or so and it is highly likely Germany will back out of the Euro altogether.

Moreover, the world central banks are now totally out of ammunition. They’ve spent Trillions of Dollars in bailouts, abandoned accounting standards, and even moved TRILLIONs in garbage debt onto the public’s balance sheet.

None of this has worked. The credit markets are jammed up just like in 2008. Italy, the third largest bond market in the world, is on the verge of default. No one wants to fund the EFSF. China is entering a hard landing and economic collapse. The US is in a clear depression.

So what does one do if one believes this or a similar scenario is unfolding? Given the uncertainty associated with any forecast, especially one of this type,one, one must be careful, flexible and agile. Positions should be considered temporary rather than long-term. You are renting assets rather than owning them! Positions must change frequently as your perceptions of what is happening changes.

Here are some thoughts, not meant to be recommendations but alternatives, that traditional investors normally do not consider:

  • Turning coward for a while (i.e., going to cash) is not bad. That may mean 100% or some high percentage, depending upon your risk tolerance and outlook.
  • Going short is another option, although riskier and not necessarily for people who like to sleep well. If chosen, this strategy does not have to be a full commitment. It can include hedging long positions you might want to continue to hold. Buying puts, selling covered calls, etc. are some strategies.
  • Buying gold is another option in times of turmoil, especially when currencies are in danger of failing. Gold has been highly correlated with general market movements recently. While I don’t expect that to continue, if it does, it will not protect you from stock swings. The risk of sovereign defaults should bring gold back to its low or negative correlation to equities. Again, a relative shift in your portfolio rather than an all-in commitment is prudent for those considering this alternative.
These are not times for investors. Lots of money will be made and lost in the next few years, but it is unlikely that traditional investors will be on the winning side of the outcome. Conditions are ideal for gamblers which most of us have abhorred during most or all of our accumulation experience.
Err on the side of caution and conservatism. Five years from now, the elite performers will be those who preserved their purchasing power. Good luck and be careful, whatever you choose to do!
I welcome comments on whatever strategies those who foresee a similar future are using. Perhaps such a dialogue will be helpful to all.